F&I

State AGs Urge U.S. Senate to Reject Resolution to Block CFPB’s Arbitration Rule

WASHINGTON, D.C. — In a letter dated July 28, 21 state attorneys general called on U.S. Senate leaders to support the Consumer Financial Protection Bureau’s new arbitration rule and oppose the current attempt to overturn the rule under the Congressional Review Act (CRA).

The letter was sent three days after the Republican-controlled House of Representatives approved a resolution of disapproval under the CRA to block the CFPB’s rule banning the use of mandatory, pre-dispute arbitration agreements in finance contracts. The Senate, where Republicans hold a slim 52-48 majority, received the resolution the same day for consideration. It has since been referred to the Committee on Banking, Housing, and Urban Affairs.

Under the CRA, the resolution must pass both houses by s simple majority and receive the president’s signature to repeal the bureau’s rule.

“We urge you to consider the CFPB’s careful and well-researched work in support of the rule, including its thoughtful analysis of the limited cost of the rule to businesses when compared to its benefits to consumers,” the regulators wrote, in part. “Finally, the arbitration rule does not prohibit all arbitration clauses in financial services contracts, but only those that contain class action waivers — even though a number of states attorneys general had urged the CFPB to ban all mandatory, pre-dispute arbitration clauses.”

The letter was also issued eight days after the bureau published its arbitration rule in the Federal Register. The publishing of the rule set the rule’s effective date for Sept. 18 and its compliance date for March 19, 2018.

Under the CFPB’s arbitration rule, companies can still include arbitration clauses in finance contracts. However, creditors subject to the rule can’t use arbitration to stop consumers from being part of a group action. The rule also includes specific language companies will need to use if they include an arbitration clause in a new contract.

The rule also requires companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The bureau will also collect correspondence companies receive from arbitration administrators regarding a company’s nonpayment of arbitration fees and its failure to follow the arbitrator’s fairness standards.

Bureau officials said the collected materials, which must be submitted with appropriate redactions of personal information, will allow it to better understand and monitor arbitration. They will also be published on the bureau’s website beginning in July 2019.

The new rule applies to the major markets for consumer financial products and services overseen by the bureau, including those that lend money, store money, and move or exchange money. Congress already prohibits arbitration agreements in the residential mortgage market and has done the same in many forms of credit extended to servicemembers and their families.

Attorney Tom Hudson said the rule will impact dealers exempt from the bureau's jurisdiction indirectly, while nonexempt dealers will be impacted directly. The question is whether the rule permits the financing of a vehicle service contract — sold in both cash and credit transactions — containing an arbitration agreement barring class relief.

The attorneys general charged in their letter that businesses have used mandatory pre-dispute arbitration clauses to block consumers from obtaining redress for contractual overcharges and “for clear violations of state and federal laws.” They also believe that consumers “often do not sign, but are forced to adhere to, without understanding that such provisions waive important legal rights.”

“While the financial services industry promotes arbitration, the truth is that most of their consumers can’t afford it,” the regulators wrote, in part. “When financial services companies require their customers to use individual arbitration to address their complaints and disputes, most consumers simply lack the time and resources to arbitrate a dispute on their own or to hire an attorney to file a claim on their behalf.”

The regulators pointed out that Congress has also recognized that “class action lawsuits are an important and valuable part of the legal system,” and noted that even the Republican House Liberty Caucus recent said that “class action lawsuits are a market-based solution for addressing widespread breaches of contract, violations of property rights, and infringements of other legal rights.”

The regulators closed their letter with this: “We urged you to vote against the joint resolution disapproval. Everyday consumers deserve nothing less.”

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